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U.S. Infrastructure Funding Needs More Than a Quick Fix

Public investment in infrastructure sits at its lowest level since records have been kept because of underfunding across all levels of government.

Q2 2015
Editor’s Note: This analysis is excerpted from commentary originally published by Moody’s. When you are done reading, click here to get more in-depth analysis on the factors that have led to a decline in infrastructure investment, and what it may take to reverse this trend.

The pending shortfall in the Federal Highway Trust Fund has rekindled the annual debate surrounding U.S. infrastructure spending. The problem is getting bigger with time and, as a result, possible solutions are becoming much less palatable. Government investment in structures — defined by the Bureau of Economic Analysis as everything from roads to school buildings to transmission lines — has sharply declined as a share of the economy in the last decade, and today sits at its lowest level since records have been kept. On a per capita basis, real government spending on structures is the lowest it has been since at least 1950.

Growing Costs
Three main factors are to blame. First and foremost, the costs of expanding and maintaining the nation’s infrastructure are growing faster than the revenue streams devoted to fund them. This is most obvious in the relationship between transportation infrastructure and gasoline taxes. The per gallon federal fuel tax of 18.4 cents has not moved since 1993. As a result, inflation has slowly eaten away at the purchasing power of those collections.
It is no coincidence that since the last time the federal gas tax was raised, highway, street, and bridge construction jobs have increased at half the pace of the rest of the construction industry and only two thirds the pace of the overall labor market
These dynamics also hold true at the state level, even though state policymakers have been much more proactive at raising fuel taxes. This is good for consumers, but terrible for the programs supported by the taxes — in this case transportation spending. It is no coincidence that since the last time the federal gas tax was raised, highway, street, and bridge construction jobs have increased at half the pace of the rest of the construction industry and only two thirds the pace of the overall labor market.

The burden of paying to expand and maintain the country’s infrastructure is spread widely across the three levels of government. However, the data show the pace of funding growth has been much more sluggish at the federal level. The Federal Highway Trust Fund has become so unsustainable as a result that the government has had to make continual supplemental appropriations from the general fund just to keep it solvent. The structural imbalance in the fund has widened to about $13 billion per year.

Second, construction costs have accelerated more quickly than overall prices. This means that not only has the U.S. been investing fewer dollars in infrastructure, but those dollars also are not going as far as they once did. Infrastructure input prices, especially for items such as asphalt, steel scrap, and concrete, have risen twice as fast as overall prices since 2000. Finally, states and local governments have been increasingly unable to prioritize discretionary spending on infrastructure because of growing mandatory pressures from Medicaid and pensions. This has prevented them from more fully offsetting softer federal support despite increasing state gas taxes. More than three quarters of states have a higher fuel tax levy than the federal government, but fuel taxes as a share of total state taxes have still declined from 6.7 percent in 1993 to just over 5 percent today. State and local government policymakers remain a bit gun-shy when it comes to borrowing in the shadow of the Great Recession. Some of this hesitancy flows from federal funding uncertainty brought on by continued budget showdowns. If policymakers across all levels of government can surmount these obstacles, both fiscal and political, and get back in the habit of investing in infrastructure, the economic benefits would be immense.

What’s Needed
The best demonstration of how far we have fallen behind as a nation on infrastructure investment is to project what it would take to get back to historical averages. To maintain public investment in infrastructure at 1.9 percent of real GDP over the next decade — equal to the average rate over the last 20 years — federal, state and local governments would need to boost spending by a total of $863 billion above current levels. This compares with a baseline forecast of about 1.5 percent of real GDP, assuming current funding levels, which equates to an additional $86 billion averaged annually across all three levels of government, or an approximately 30 percent increase from 2014 levels.
The preferred political solution in Washington leans heavily toward repatriation of corporate profits held overseas
The economic implications of such a move would be immense. Using an economic multiplier of 1.78, in line with past research for a relatively stable point in the business cycle, we can intuit a 10-year nominal GDP impact of more than $1.5 trillion. In the Moody’s Analytics macroeconomic forecast model this would support an additional 12.7 million jobs over 10 years versus the baseline, a cost of roughly $120,000 per job.

There would also be offsetting negative impacts to the economy from higher taxes and borrowing costs. The largest offset would come from higher tax burdens for drivers and businesses, taking up a greater portion of disposable incomes that would otherwise be spent on other goods and services. Gas taxes, in particular, are very regressive, hitting lower-income Americans who generally spend a greater percentage of their earnings on consumer staples such as fuel, food, and shelter. States with poorer populations and with longer commuting patterns would be disproportionately affected by higher gas taxes.

Getting to $863 billion in additional infrastructure spending over the next 10 years is a tall order. The extra $86 billion per year breaks down to about $20 billion in federal funding versus $66 billion in state and local government funding, holding the current funding breakdown constant. The preferred political solution in Washington leans heavily toward repatriation of corporate profits held overseas. Such a move would be a more politically palatable one-time funding boost that could get us through the next election cycle but no further. The one-time funding available through repatriation or a transition tax would be a powerful tool to use in transitioning U.S. infrastructure spending to a long-term solution, but that is where things really get tricky.

Looking for a Long-Term Solution
No single long-term solution has presented itself as the obvious heir to the federal gas tax. While most agree that a long-term solution should ultimately be tied to usage, none of the budding contenders, ranging from mileage fees to carbon taxes, are ready for prime time when it comes to administrative or other practical hurdles. The states will likely need to lead the federal government. States and local governments can also help further offset federal weakness by continuing to embrace toll roads and other forms of public-private partnerships to make ends meet and keep infrastructure up to date.

Under the White House’s Grow America plan and similar congressional proposals, the federal government would cover about $26 billion of the average necessary $86 billion annual increase, leaving a $60 billion bill for state and local governments. Put in perspective, that is the equivalent to a nationwide gas tax increase of 47 cents, 2.5 times the current federal levy. Given states’ already-stressed budget situations, more of the solution will have to come from the federal government than it has been willing to shoulder over the last few decades.
To maintain public investment in infrastructure at 1.9 percent of real GDP over the next decade — equal to the average rate over the last 20 years — federal, state and local governments would need to boost spending by a total of $863 billion above current levels
Which brings us to the only other, and least popular, option: gradually raising the federal gas tax and indexing it with a construction-specific price index to buy enough time to get to that new long-term solution. Raising the current levy while indexing it to inflation makes economic sense and is the simplest and most immediate way to increase infrastructure investment, but not even oil priced at $45 per barrel will be able to make it politically palatable enough for most lawmakers.

Any movement toward getting back in the habit of funding infrastructure for more than a few years would require herculean political will from the president and congressional leaders, as well as from state legislators and governors across the country. Furthermore, any permanent fix would also require more than just repatriation and indexation of the gas tax. This year, it is all but assured that Congress will lack the political will necessary to pass more than another short-term fix to the Federal Highway Trust Fund, even though the dynamics of a new Congress, a second-term president, and plunging oil prices present some of the most favorable conditions for a long-term solution in some time. The economic benefits would be worth the risk.

State Gains from Higher Infrastructure Investment vs. Baseline
State Infrastructure investment ($B) Gross state product ($B) Jobs (1,000's)
Alabama $11.20 $20.20 212.3
Alaska $5.00 $8.60 45.4
Arizona $19.10 $33.40 295
Arkansas $5.50 $9.80 92.1
California $116.10 $200.00 1,408.10
Colorado $15.70 $28.10 234.8
Connecticut $7.90 $15.10 100.2
DC $5.00 $5.00 43
Delaware $2.80 $8.90 75
Florida $56.10 $97.60 909.5
Georgia $27.10 $48.20 387.8
Hawaii $3.30 $6.10 31
Idaho $3.30 $5.80 50.9
Illinois $33.90 $62.40 485.6
Indiana $14.10 $25.70 234.1
Iowa $9.50 $16.80 163
Kansas $7.80 $13.40 133.4
Kentucky $9.60 $17.40 169.3
Louisiana $13.00 $22.60 227.8
Maine $2.20 $4.00 39.4
Maryland $12.20 $23.20 201
Massachusetts $15.70 $31.20 193.3
Michigan $18.10 $35.50 279.9
Minnesota $15.30 $28.20 198.9
Mississippi $6.70 $11.90 110.6
Missouri $13.20 $24.00 239.1
Montana $2.70 $4.60 38.8
Nebraska $7.00 $12.30 116.7
Nevada $9.20 $15.90 109.4
New Hampshire $2.30 $4.30 31.1
New Jersey $22.80 $40.00 254.3
New Mexico $5.90 $10.30 134.4
New York $84.30 $146.50 1,069.60
North Carolina $21.10 $38.50 398.6
North Dakota $2.20 $4.10 31.4
Ohio $28.80 $52.40 455
Oklahoma $8.80 $15.50 137
Oregon $10.20 $18.30 148.7
Pennsylvania $30.30 $54.50 468.4
Rhode Island $1.80 $3.30 19.5
South Carolina $11.70 $20.90 208.3
South Dakota $2.60 $4.60 45.3
Tennessee $12.00 $22.70 213.6
Texas $73.80 $130.00 1,058.10
Utah $9.00 $15.50 136.8
Vermont $1.20 $2.10 21.5
Virginia $18.10 $32.50 313.5
Washington $27.50 $47.10 375.3
West Virginia $3.80 $6.80 72.3
Wisconsin $12.90 $24.40 210
Wyoming $3.30 $5.60 54.9
U.S. $862.90 $1,535.90 12,683.10
State Gains from Higher Infrastructure Investment vs. Baseline. Sources: Census Bureau, BEA, BLS, Moody’s Analytics
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